Legal provision for Tariff determination

2. Legal provision for Tariff determination 61. The Appropriate Commission shall, subject to the provisions of this Act, specify the terms and conditions for the determination of tariff, and in doing so, shall be guided by the following, namely:- (a) the principles and methodologies specified by the Central Commission for determination of the tariff applicable to generating companies and transmission licensees; (b) the generation, transmission, distribution and supply of electricity are conducted on commercial principles; (c) the factors which would encourage competition, efficiency, economical use of the resources, good performance and optimum investments; (d) safeguarding of consumers' interestand at the same time, recovery of the cost of electricity in a reasonable manner; (e) the principles rewarding efficiency in performance; multi year tariffprinciples; (g) that the tariff progressively reflects the cost of supply of electricity and also, reduces and eliminates cross-subsidieswithin the period to be specified by the Appropriate Commission; (h) the promotion of co-generation and generation of electricity from renewable sourcesof energy; (i) the National Electricity Policy and tariff policy: Provided that the terms and conditions for determination of tariff under the Electricity (Supply) Act, 1948, the Electricity Regulatory Commission Act, 1998 and the enactments specified in the Schedule as they stood immediately before the appointed date, shall continue to apply for a period of one year or until the terms and conditions for tariff are specified under this section, whichever is earlier.

3. Legal provision for Tariff determination 62. (1) The Appropriate Commission shall determine the tariff in accordance with provisions of this Act for – (a) supply of electricity by a generating company to a distribution licensee: Provided that the Appropriate Commission may, in case of shortage of supply of electricity, fix the minimum and maximum ceiling of tariff for sale or purchase of electricity in pursuance of an agreement, entered into between a generating company and a licensee or between licensees, for a period not exceeding one year to ensure reasonable prices of electricity; (b) transmission of electricity ; (c) wheeling of electricity; (d) retail sale of electricity. Provided that in case of distribution of electricity in the same area by two or more distribution licensees, the Appropriate Commission may, for promoting competition among distribution licensees, fix only maximum ceiling of tariff for retail sale of electricity. (2) The Appropriate Commission may require a licensee or a generating company to furnish separate details, as may be specified in respect of generation, transmission and distribution for determination of tariff. (3) The Appropriate Commission shall not, while determining the tariff under this Act, show undue preference to any consumer of electricity but may differentiate according to the consumer's load factor, power factor, voltage, total consumption of electricity during any specified period or the time at which the supply is required or the geographical position of any area, the nature of supply and the purpose for which the supply is required. (4) No tariff or part of any tariff may ordinarily be amended more frequently than once in any financial year, except in respect of any changes expressly permitted under the terms of any fuel surcharge formula as may be specified. (5) The Commission may require a licensee or a generating company to comply with such procedures as may be specified for calculating the expected revenues from the tariff and charges which he or it is permitted to recover. (6) If any licensee or a generating company recovers a price or charge exceeding the tariff determined under this section, the excess amount shall be recoverable by the person who has paid such price or charge along with interest equivalent to the bank rate without prejudice to any other liability incurred by the licensee.

4. What are Terms and Conditions of Tariff? • Rules and Norms for determining the Tariff of ISGS and Transmission licensees. • Applicable to • a) Generating Stations supplying to more than one beneficiary (Thermal, Hydro, CCGT) • (NTPC, NLC, NHPC, DVC, NEEPCO) • b) Inter State Transmission System • Tariff of Nuclear power stations is fixed by DAE.

5. Some Imp Definitions and terminology • Control Period : Period for which tariff is specified (April 2009-March 2014) • MYT : Multi Year Tariff: The tariff spread over useful life of the equipment • Beneficiary : Person purchasing power from the ISGS • Cut off date :Last day of FY after 2 years from the CoD. • Date of Commercial Operation: date from which Tariff recovery starts • ‘Infirm power’ : Power injected before CoD. • ‘Inter-State generating station’ or ‘ISGS’ : Gen Stns supplying power to more than one state. • ‘Useful life’: Life of the system from CoD used for computing Depreciation and determination of Tariff norms. • ( Coal/Gas based/ Substation=25 yrs, Hydro/Line 35 yrs) • ‘Design energy' means the quantum of energy which can be generated in a 90% dependable year with 95% installed capacity of the hydro generating station;

6. Time Lines in Tariff Period Project schedule and CoD to determine addl. RoE Control Period 1 Control Period 2 Control Period 5 Tariff after Renovation and Modernisation Construction Period Control Period 1 Billing starts 2-3 months 10-12 yrs 2-3 months 2-4 years 2+ years Operating Norms for extended period of life Eligibility for R&M Depreciation in straight Line method (12 years) 1st Trial synchronisation CoD Adjustment billing for as per True I Up Cut-Off Date for addl . Capitalisation Apply for True I Up of Tarriff Project Start date (2- 4 years) End of Loan repayment True I Up by CERC End of Useful Life

7. Steps in Tariff and Collection Audited Costs Apply for Tariff fixation (6 months before) Bench mark norms of Project Cost Tariff fixation CoD Accounting in REA Billing by the ISGS/ ISTS Audited Costs Cut off Date Filing of AddCap+ deferred Liabilities +actual Expenditure Truing up by CERC Beneficiaries Interest Rates Adjustment of Excess or Deficit collection For every Control period for existing Projects also Tariff fixation to be done

8. Rs. Total Project Cost considered for Tariff fixation Project Exp. Asstets not in Use (for next tariff periods) IDC FERV Profit in Sale of Infirm power Capital Cost Initial Spares Addl Cap Debt:Equity Ratio Rehab & Resettle (hydro) Equity Loan Contribution to RGGYY (hydro)

9. Computation of Capacity Charges Rate of RoE Equity Return Equity Rate of Interest Interest on Loan Loan Rate of Depreciation Loan +Equity Depreciation Interest rates Interest on Working Capital Working Capital Type/Size of Unit/ / Tr. system O&M Exp Normative O&M Exp Normative Seondary Oil consumption Sec Oil charges Sec. Oilrates

10. Annual Fixed charges Return Equity Interest on Loan Availability factor Depreciation O&M Exp Annual Fixed Charges Interest on Working Capital Monthly Fixed Charges Secondary Oil Consumption R&M allowance (after Useful Life)

11. Interest On Loan • Normative Loans = Actual Loan + Equity beyond 30% (A) • Normative Loan Outstanding= Loan- Depreciation (B) • Interest on Loan = Normative Loan Outstanding * Wt, Avg. Rate of Interest

12. Depreciation Regulation 17 • Allowed up to maximum of 90% of the capital cost and salvage value is 10% • 5.28% for 1st 12 years Balance depreciable value spread over the balance useful life • IT eqpt.=15% ; PLCC=6.33 ; Motor vehicles=9.5% ; AC=9.5% • Bldgs= 3.34% • Land under lease=3.34% • Temp erections=100% • Advance Against Depreciation removed

13. Computation of Capacity Charges Rate of RoE Equity Return Equity Rate of Interest Interest on Loan Loan Rate of Depreciation Loan +Equity Depreciation Interest rates Interest on Working Capital Working Capital Type/Size of Unit/ / Tr. system O&M Exp Normative O&M Exp Normative Seondary Oil consumption Sec Oil charges Sec. Oilrates

14. Annual Fixed charges Return Equity Interest on Loan Availability factor Depreciation O&M Exp Annual Fixed Charges Interest on Working Capital Monthly Fixed Charges Secondary Oil Consumption R&M allowance (after Useful Life)

15. Interest On Loan • Normative Loans = Actual Loan + Equity beyond 30% (A) • Normative Loan Outstanding= Loan- Depreciation (B) • Interest on Loan = Normative Loan Outstanding * Wt, Avg. Rate of Interest

16. Depreciation Regulation 17 • Allowed up to maximum of 90% of the capital cost and salvage value is 10% • 5.28% for 1st 12 years Balance depreciable value spread over the balance useful life • IT eqpt.=15% ; PLCC=6.33 ; Motor vehicles=9.5% ; AC=9.5% • Bldgs= 3.34% • Land under lease=3.34% • Temp erections=100% • Advance Against Depreciation removed

17. working Capital Computation Cost of 1.5* month primary fuel / Lime Stone Stock * 2 months for non-pit head stns. O&M Exp for 1 month Cost of 2 months Sec oil Stock Working Capital Cost of Maint. Spares (as a % of O&M ch.) Interest rates 2 months receivables Interest on Working Capital Note :For Hydro stations and Transmission system, fuel stock, sec. oil stock not applicable

18. Bench marking Model for Transmission lines Benchmarking by CERC Voltage class No. of circuits Conductor type No. of Conductors Insulator type • Bill of Quantities • Conductor length • Earthwire length • No. of insulators • Qty. of Hardware • Tower Weights • Foundation Volume Line length Wind zones & Terrain No. of Towers Types of Terrains No. of River crossings Total cost / Cost per ckm Unit cost based on historical data and Application of PV Formula and indices Generous set of assumptions Source: CERC Explanatory Memorandum ( 8th Dec.’09)

19. Availability Calculation of Transmission System Availability = (100-100*NAFM) Where NAFM= Non-availability factor in per unit for the month 1) For AC system [ Σ ( OHL x CktkmL x NSCL ) + Σ ( OHT x MVA T x 2.5 ) +Σ ( OHR x MVAR R x 4 ) ] THM x [ Σ (Cktkml xNSCL ) + Σ (MVAT x 2.5 ) + Σ (MVARR x 4 ) ] Where OHL, OHT & OHR = Outage hours for Line or Transformer or Reactor Cktkm = Length of a transmission line circuit in km NSC = Number of sub-conductors per phase MVA = MVA rating of a transformer / ICT MVAR = MVAR rating of a bus reactor, THM = Total hours in the month 2) NAFM for each HVDC system NAFM = [ Σ (TCR x hours) ] ÷ [ THM x RC ] • TCR = Transmission capability reduction of the system in MW • RC = Rated capacity of the system in MW.

20. Transmission charges of ISTS : • Monthly transmission Charges = AFC x ( NDM / NDY ) x ( TAFM / NATAF ) • If TAFM > NATAF, incentive will be given • For 1% increase in Avb, 1% of Fixed charges are given

21. Sample Calculation of Tariff – CERC Norms 2009-14 Case Study : A Project Consisting 1 No. 400KV D/C Transmission Line of 75 km line length and 4 Nos of 400KV Bays. Capital Cost of the Project : Rs 100 Cr Adopting Debt : Equity Ratio of 70 : 30 Loan (Debt) Amount : Rs 70 Cr Equity Amount : Rs 30 Cr CALCULATION OF TARIFF for 2009-10 (For illustration purpose only) Interest on Loan : 70 x 0.095 = 6.65 Cr ( IOL @ 9.5%) Return on Equity : 30 x 0.17481 = 5.24 Cr (ROE @ 17.481% {15.5%/ 16% before MAT}) Depreciation : 100 x 0.0528 = 5.28 Cr (Depreciation @ 5.28% {Building : 3.34%, TL/SS : 5.28% , PLCC : 6.33 % and balance spread over after 12 Years}) O&M Expenses = 2.57 Cr 4 No * 52.40 Lakh/Bay (400KV) 75 Km * 0.627 Lakh/Km (400KV D/c Twin) Interest on Working Capital @ 12.25% = 0.41 Cr ( WC=2 Month Receivables + 1 Month O&M + 15% O&M for spares) TOTAL TARIFF = Rs. 20.15 Cr / year

22. Note : Only for illustration purpose. Norms assumed to remain same through out for all control periods

23. Will Tariff be paid after ‘Useful life’? • Yes. Tariff is receivable by the Owner • ‘Depreciation’ component will not be receivable • Eligible for Renovation and Moderation • Various options for the owner: • Asset can be written off • and new project can be constructed • or R&M can be taken up • Allowance for R&M Rs.5Lac/MW/yr through Fixed Charges • R&M charges escalable @5.72%p.a. • R&M as a separate project ‘useful life’ in relation to a unit of a generating station and transmission system from the COD shall mean the following, namely:- (a) Coal/Lignite based station :25 years (b) Gas/Liquid fuel based station :25 years (c) AC and DC sub-station: 25 years (d) Hydro generating station : 35 years (e) Transmission line : 35 years